Nvidia (NVDA) Stands at a Critical Level as Their Earnings Report Looms Large

• Some poor earnings reports are offsetting a mild drop in bond yields this morning.  So, the stock market might take a breather over the near-term.  That would not be the worst development in the world after the sharp rally we’ve seen over the past three weeks.
• Nvidia (NVDA) has had a GREAT year this year.  However, it has actually been range-bound for many months.  It is now testing the top end of that range.  It reports earnings on Tuesday…and the last two reports have created vastly different reactions (despite the fact that they’ve both been fabulous reports).  How it reacts this time around is going to be very important for the stock…the tech sector…and likely, the broad stock market.

The stock market finished the day yesterday with mild gains, but all of the major averages closed well off their highs for the day.  This would be disappointing on most days, but given how much the market has rallied over the past three weeks…and how strongly it advanced on Tuesday…yesterday’s decline from the morning highs is something that should be thought of as normal and healthy.  We’d also note that the yield on 10yr note popped back above 4.5% yesterday, so that’s another reason why the lack of upside follow-through yesterday was not a surprise.

 Bond yields have declined slightly this morning, but the stock futures are still trading a bit lower after several earnings reports came in lower than expectations.  Last night, Cisco (CSCO) and Palo Alto Networks (PANW) reported lower-than-expected earnings/guidance…and this morning, WMT is trading 7% lower on their renewed comments about the weakness of the consumer (especially in late October).  Thus, the concern over earnings is somewhat offsetting the impact of lower bond yields.

 Of course, we could see a situation where concerns over the consumer and the economy will turn into one where lower bond yields will actually cause the stock market to decline, but that scenario still seems to exist somewhere in the future right now.  However, the fact that over the past 70 years…whenever a sharp/extended increase in bond yields has been followed by a significant decline in those yields, it has then been followed by a deep correction in the stock market…means that this scenario is not out of the question at some point in the future.  (In other words, if a sharp decline in yields signals a significant slowdown in the economy…or a recession…that kind of move in yields will suddenly become a bearish development.)

 The decline in the price of Nvidia (NVDA) yesterday caught some investors by surprise.  Don’t get us wrong, the drop was only 1.5%.  So, after a 23% jump off its late-October low, this decline was not something that raised any warning flags on the stock.  However, the fact that it rolled over from the $500 level…which was also its high from the summer…did make it an interesting development. 

 There is absolutely no question that NVDA has been an unbelievable stock this year.  It’s YTD rally of over 230% has been fabulous.  However, it is worth noting that the vast majority of that gain came by the middle of July.  Therefore, the stock has been stuck in the middle of a sideways range for several months now.  Thankfully, NVDA was able to bounce strongly off the bottom of that range three weeks ago.  Now, it is testing the top end of that range…and whether it can finally break above that range…or roll back over and fall back into the middle of it…will be very important for how the stock finishes the year (and very likely how the rest of the market behaves into year-end as well).

 With NVDA’s earnings report coming after the close on Tuesday, we should get our answer at some point soon.  There are plenty of reasons to think that NVDA will report another great quarter.  However, we have to remember that they have reported extraordinary earnings each of the last two quarters…but the reaction to each report was decidedly different.  When they reported in May, the stock jumped in a MAJOR way…and then kept on rising over the next two months.  However, when they reported in August, the stock rolled over (after an initial jump)…and declined almost 20% over the next two months.  Therefore, there is no guarantee that another good report will cause another extended rally…especially now that NVDA has become overbought after its recent big run.  

 Thankfully, we have a very distinct level to watch as the stock trades in the days following their earnings announcement.  If it can move above $500 in a meaningful way…and stay above it as we move past the Thanksgiving Holiday week…it’s going to be very bullish.  If, however, it rolls-over in any material way (even if that comes after another initial pop), it’s going to create some headwinds for NVDA…and likely the rest of the tech sector…in the month of December. 

 NVDA is a GREAT company with GREAT prospects.  It will almost certainly be trading at a much higher level 5 years from now compared to where it is today.  However, no stock moves in a straight line, so we’ll want to see how it trades during the week or so following its earnings report.  How it trades should have a big impact on the tech sector for the rest of the year…and very likely for the entire stock market as well.

 In other words, the action in the stock market over the past three weeks has been quite good.  It has been the kind that is usually followed by more upside movement.  However, we’ll still need to keep a close eye on bond yields…and the action in important stocks like NVDA…to decipher how the stock market will perform over the last 5-6 weeks of 2023.